Source: AP Photo/Wilfredo Lee
Marx considered profits to be theft by capitalists from their workers. He believed labor alone creates value so workers should get all the profits from their labor and the capitalists should get none. His mind was too weak to grasp the idea that capital is stored labor.
The Democrat party hates profits, too. At least seven Democrat presidential candidates have proposed raising the corporate income tax rate and if the American people would let them, the party would tax away all profits. Non-profits are saintly in their fevered imagination; for-profit companies are the spawn of Satan.
The standard apologetic for profits says that the desire for profits gives capitalists an incentive to invest, which it does. Then socialists play the morality card and ask why capitalists don’t invest out of love for their fellow man.
Incentives are important, but profits play a much greater role in society. They are the only effective guide to the allocation of resources. Profits are the “invisible hand” of Smith. For Democrats, the term “allocation of resources” means that someone must decide how to deploy our scarce resources. And yes, they are scarce. Socialism assumes unlimited resources.
Socialists have always believed the state could plan and direct resources much better than the market. They call the market “anarchy.” But the defunct Soviet Union proved them wrong as the great historian Guinevere Liberty Nell showed in her book Rediscovering Fire: Basic Economic Lessons from the Soviet Experiment. In one example, the Soviets discovered that if they set quotas for glass production by weight, they would get very heavy glass that no one could use. But if they measured glass production by size, they would get glass so thin it would shatter.
Someone must decide what to produce, how much and when, as every intro to economics textbook explains. Socialists give that job to bureaucrats. In a free market, capitalists do the job by watching profits. High profits signal to capitalists that certain goods and services are in short supply and need greater investment. As more capitalists invest in high profit businesses, the supply of goods and services increases; prices fall and along with them, profits. Low profits inform capitalists that they have invested too much in some sectors. The allocation of capital is not anarchic in a free economy; it’s rational.
How do capitalists know which industries to invest in and which ones to avoid? For the most part, they follow the stock market. Market investors reward companies that generate profits by pleasing customers through buying shares of their stock and punish companies with low profits by selling their shares. In that way, capitalists guarantee that American citizens get what they want. We don’t have to rely on the charity or good will of capitalists, or the wisdom of bureaucrats, who have none; the desire for profits forces capitalists to invest for our benefit.
Everyone who holds shares of stock in their retirement plan is a capitalist and helps guide the economy, even if they stash their nest eggs in an index fund that follows the S&P 500. That’s because those indexes are recalculated on a regular basis so that more of the funds’ money goes to the most successful companies and less to the companies producing things that consumers don’t want.
Of course, socialists have prepared their response. They argue that corporations control the minds of consumers and determine our desires through advertising, which forces us to buy things we really don’t want. So, corporations manipulate consumers to direct the economy in a way that serves the corporations, not consumers. However, if consumers really are as stupid as socialists claim, then why do we let them vote? And if advertising is as powerful as socialists claim, political ads will make citizens vote for the candidates who spend the most on advertising and we have no democracy.
The truth is that socialists have latched onto the exaggerated claims about the power of advertising fabricated by advertising executives. Those executives have a financial interest in persuading people that their product is irresistible. But advertising is not as powerful as socialists and advertising executives claim; most advertising is wasted money according to research. And voters aren’t mindless amoebas waiting for advertising agencies to tell them what to think and buy. Socialists have too low a view of regular citizens and too high an opinion of their bureaucrats.
The USSR, China, North Korea, Cuba, Venezuela and other socialist countries have proven that bureaucrats cannot plan investments well. All have driven their people to starvation, no matter how good their intentions were. Again, socialists have their stock answers ready. They say they don’t want to imitate failed states but desire the democratic socialism of Europe. However, while their socialism-light has kept Europe from the sad histories of the aggressive socialist countries, a little bit of its poison still damages the body as seen in the fact that the poorest fifth in the US are wealthier than the average European.
Nothing in the history of mankind has proven as successful as the system in which capitalists (all investors no matter how meager their wealth) direct the allocation of scarce resources through their pursuit of profits.
Originally published at Townhall Finance.
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